In the Red —

Nokia debt downgraded as company struggles

On Monday, Moody's Investors Service downgraded Nokia's corporate debt to near-junk status. The company's decline in sales numbers and 35 percent fall in revenue have earned it a Baa3 rating, or one step away from non-investment grade. This latest drop marks the most recent stumbling block for a company that was once the pinnacle of Finnish innovation and pioneered the global rise in mobile phones.

Nokia's financial reputation has been on the decline for some time, with its unit shipments dropping from 26.5 million in Q3 2010 to just 16.8 million in Q3 2011, capturing 14.4 percent of the global smartphone market. Forbespoints out that Nokia is being edged out of the low-end handset market in countries like Africa, India and China by companies like ZTE and Micromax, which is negatively affecting its shipment figures.

The company is in the middle of recasting itself as a mid-range to high-end smartphone source with its Lumia line of Windows Phone handsets. This includes AT&T's Lumia 900, which launched with a data connectivity glitch that Nokia quickly owned up to and fixed. However, given that the high end of the market has been plenty saturated with RIM, Apple, and Android devices—the company's strategy remains quite a gamble.

But the low- to high-end transition is happening too slowly for Moody's tastes: "Nokia's transition in its Smart Devices from Symbian-based phones to the Windows-based Lumia devices is proving more challenging than expected given that sales of Symbian-based devices are falling off very quickly while Lumia sales are only ramping up slowly," the agency said in its report.

Nokia responded that its investment rating is backed by its "strong liquidity position and capital structure," with a gross cash balance of €9.8 billion ($12.8 billion). "Nokia will continue to increase its focus on lowering the company's cost structure, improving cash flow and maintaining a strong financial position," said Timo Ihamuotila, Nokia's executive vice president and CFO, in a statement.

AT&T, Nokia's partner in relaunching the brand in the US, did not respond immediately to requests for comment. Nokia is set to announce its first-quarter results for 2012 on April 19.

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Casey Johnston
Casey Johnston is the former Culture Editor at Ars Technica, and now does the occasional freelance story. She graduated from Columbia University with a degree in Applied Physics. Twitter@caseyjohnston

54 Reader Comments

The transition was of course going to be rocky, but analysts think they might run out of money before the holidays. That is beyond a rocky transition - that's no transition. That would mean the Lumia WP7 phones barely had a year of life and that their flagship phone didn't make it a year.

Nokia is predicting a losses of up to about 300m euro for the March quarter, far worse than market expectations (and since the quarter is over, it's probably accurate) and similar the next quarter, maybe a bit worse. They have about 11b euro in cash and short term investments though.

They would pretty much have to stop selling phones, entirely, to run out of money before the holidays.

Calling WP7 "high-end" brings tears to my eyes. Each Symbian phone sold carried more profit for Nokia than any Lumia, even at half the price. Nokia has been taking Microsoft's money and basically giving phones away with it, while teams inside Nokia show Microsoft how to develop basic accoutrements of mobile tech that are missing from WP7, and turn Nokia Labs developments into "one-more-WP7-app", strengthening Microsoft.

Ballmer should do the honorable thing and just make an honest woman out of Nokia.

Wait, what? Tigas, do you claim that the $170 ASP Symbian smartphones had greater profit than the $270 ASP WP smartphones?

In any case, the problem is that even before the burning platform memo, Symbian smartphone sales were only growing due to ASP falling, and at some point that was going to collapse entirely. Nokia self publishes their profit performance.

5.4b 20067.8b 20074.9b 20081.1b 20092.0b 2010

They were clearly tanking without switching to WP7 or burning down Symbian.

This from the same bunch of clowns who brought us the mortgage crisis. If they say Nokia is more risky now, I'd say this is as good a time as any to go ahead and buy more of their shares and debt.

I'll admit I did not think of this. Good point!

I'm not really concerned with Nokia's position - even if my Lumia 800 never gets an update again it's still a sweet machine. Companies have a life cycle, they come and go, and although it'd be sad to see Nokia go (not that I think it'll happen) that's life.

After many missteps, Nokia's finally doing something right with MS and the Lumia range. About bloody time. I think they have time to make a comeback - maybe not back to the top of the smartphone game straight away, but they're not going down in flames either.

Nokia doesn't have that in cash; that's the value of all their assets combined along with cash.

Their cash on hand is between $4 Billion and $6 Billion; some have surmised that this is only enough to get them through the next six or seven months, before Nokia needs to start selling off large swaths of the company in order to keep going, including selling their trove of wireless patents, their whole feature phone business, their stake in Nokia-Siemens Networks, and Navteq, their mapping tech software.

In Q1 alone, Nokia burned through around 700 Million Euros. It doesn't take much math to figure, at that burn rate Four Billion won't last you very long.

Nokia is a slow motion train wreck, because they assumed that their feature phone business, based on selling basic phones in emerging market nations, at one time keeping them profitable, is now in free-fall.

Hey, why not just Bomber to send them another billion or two? They're making Smurf-phones for Microshaft now, although it won't even connect to a cell network yet, but that's gotta be worth something ! WTF !!

Which means, the market thinks Nokia, with all its patents and technology and factories and its iconic brand and massive brand awareness... in only worth $2.37 billion. Wow! It's starting too look like a very nice acquisition target, if you ask me.

Symbian phones were built on Nokia factories (some of them had better efficiencies than Foxconn but without the suicides and n-hexane cripples), using long-lead-time component supplies with well-negotiated margins, and in several cases selling last-years tech or even older.

WP7 phones are OEMed and use different components (Nokia was OMAP, WP7 is Snapdragon); the factories are half-capacity or idle, but the unused component contracts still have to be bought.

ASPs notwithstanding, and while I can't say if the investment in Symbian software development *per phone* is smaller or not than the license Nokia has to pay Microsoft for WP7 *and* the software development Nokia is having to do to port every service they have from Qt/C++ to Silverlight/C#, I'd wager that *margins* with Symbian, on the whole smartphone unit, were better than with WP7.

I really like my N900, it's still a pretty decent phone even at two and a half years old, but I lost interest in Nokia when they dropped Maemo/Meego. I'd love a phone that was basically an N900 with a Tegra 3 (or comparable) processor and 1GB ram. WinPhone just doesn't interest me at all. Android is alright (I've used Android 3 and 4 on an Asus Transformer), but I still prefer Maemo's interface.